The USD has benefited from the positive trade developments between the US and China, which have helped ease some stagflation concerns in the US. Coupled with a still-hawkish Fed, the dollar could gain further momentum if additional trade progress is made. On the other hand, the recent de-escalation in US-China trade tensions is dampening safe haven demand, putting pressure on the CHF. Dovish signals from the SNB further reduce the franc’s attractiveness for now.

USD: The King is return?

The latest USD rebound has lost its impetus, suggesting that the squeeze of FX market USD-shorts has largely run its course. Moreover, the US rates markets seem to be done paring back their Fed rate cut expectations, especially after US CPI came in softer than anticipated yesterday. All this has left FX investors looking for fresh reasons to grow their USD exposure. In turn, they could start focusing more on the quality of the incoming US data as well as Fedspeak. That being said, the USD could remain supported vs low-yielding funding currencies like the JPY, the CHF and even the EUR. Abating stagflation fears in the US could slow down any rebalancing portfolio outflows out of the US.

Today, FX investors will focus on speeche by the Fed’s Powell. The USD could benefit from any signals that from Powell they are in no hurry to cut rates despite the latest de-escalation of global trade tensions that could help ease US stagflation risks.

CHF: Put your money where your mouth is!

The CHF has lost some ground vs its European peers after the SNB Governor Martin Schlegel commented earlier this week that the currency has appreciated “a lot” and that the recent FX moves could force the bank to intervene in FX markets and/or push policy rates into negative territory once again.

Given the risks that Switzerland could be labelled a currency manipulator by the US administration, an FX market intervention appears less likely in the current environment. The latest SNB FX reserves data seems to corroborate that view. The reserves fell by more than CHF20bn in April and highlighted that the sharp CHF appreciation last month likely reduced the value of the SNB USD and EUR holdings; and the SNB is still to put its money where its mouth is and intervene in FX markets to cheapen the CHF.

Therefore, market continue to believe that further rate cuts would be the path of least resistance for the SNB in the coming months and quarters. This week’s calendar is fairly light in Switzerland. The CHF could thus continue to closely follow any gyrations in global risk appetite. If the risk appetite continue improving, could expect the selling pressure remain on CHF.

USD/CHF 4H

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